A politico-economic take on fuel price hike

A politico-economic take on fuel price hike
While countries and companies have begun to set bold targets targets for cutting emissions, actual emissions continue to rise substantially. Image courtesy: Scarc/Shutterstock

Economics is politics by other means, especially in a democracy where decision-makers have to go back to the people every five years The cross-over between the two is too fine except during the time of budget-making when a modicum of high discourse takes place on fundamental economics.

What is the economics behind the recurring increase in fuel prices in India? What is the political fallout, if any? How can popularly elected Governments, both Centre and the States, be insensitive to the increasing clamour for a rollback of the increases? How much is the “noise”(in a Daniel Kahneman sense) surrounding the issue in the media?

By now, everybody knows that both the Centre and the States levy taxes on petrol and diesel, though the quantum differs It is only a difference in degree or magnitude.

It is also a known principle of fiscal policy that indirect taxes which impact all segments of the population equally is regressive. Any government which wants to mobilise income should do it rather through direct taxes (income tax, corporate tax, etc) and less through indirect taxes (on petrol/diesel, GST, etc). Governments are supposed to spend money thus mobilised for the common good of all, be it infrastructure or education or health or even welfare of the poor. It is another means of “robbing” the rich Pauls to pay the poor Peters, in short.

We now come to the question of where the taxes, especially on petrol and diesel are going? We restrict this question to only Central Government’s spends and try to understand at least perceptionally why the public uproar so far has been muted.

First, an important data point about who gets impacted the most by the increase in the prices of petrol and diesel. Look at the following consumption pattern, for a background.

The collections on petrol and diesel rose to Rs 2.94 lakh crore in the first 10 months of the current fiscal (2020-21), according to information furnished by Minister of State Anurag Singh Thakur in a written reply to a question in the Lok Sabha. “The excise duty rates have been calibrated to generate resources for infrastructure and other developmental items of expenditure keeping in view the present fiscal position," he further stated in Parliament.

It is a fact that Governments are struggling for resources and the easiest and the most efficient tax collection is through fuel as everyone knows. Even GST may have loopholes and Governments, both at the Centre and the State know only too well that tax compliance is low in areas where even a semblance of discretion for the tax-payer. So it is a golden egg.

Now we come to some aspects of utilisation/expenditure which could be correlated to the income mobilisation by the Centre.

• The Centre has been spending relatively higher amounts on infrastructure and capital expenditure in the recent yeaRs From a level of Rs 2,53,022 crores (actuals) in 2015-16, the caped of the Union Government has gone up to Rs 5,54,236 (estimated) for 2021-22, which is an increase of over 200%.

• Roads and highways have come up at a smart pace in the last few yeaRs This pace had slowed down a bit in the first half of the last decade though there was good momentum in the 2004-2012 period. The Atal tunnel in Himachal Pradesh and the Bogobeel bridge over the Brahmaputra in Assam are examples of successful completion of projects.

• Under welfare schemes, the Centre has been providing 5 kg of rice/wheat per each member of a ration-card holding family free almost every month since March/April 2020. The scheme is now extended up to at least this month-end. In a family of five, 25 kg of rice or wheat is given free of cost, for example. In all, there are 80 crore beneficiaries. The monthly expenditure is about Rs 13,000 crores. In States like Kerala, where the Public Distribution Scheme is efficient, the aid reaches almost all people.

• For farmers, the Centre introduced the much-vaunted PM Kisan Scheme in 2019 whereby they get Rs 6000 every year through Direct Benefit Transfer. The number of farmers receiving this benefit is about 10 crore. The allocation for this year is Rs 65000 cr. Total amount paid so far under the scheme is about Rs 2 lakh crore.

• During lockdown last year, the Centre transferred about Rs 30000 crores to the accounts of about 20 crore women Basic Banking account holders during three months as income support.

• The Minimum Support Prices for commodities being procured by the Centre has been hiked by nearly 50% since 2014-15. Common variety of paddy now is procured at Rs 1940 from Rs 1360 per quintal then.

• And only last week, the Union Government hiked subsidy rates on DAP fertiliser by Rs 700 per bag. This would cost an extra Rs 14,775 crore.

• The Government has also spent on other welfare schemes including the hugely-appreciated Toilet Construction programme under Swatch Bharat, which may evoke laughter during studio discussions but has made the difference between dignity and ignominy for rural women across the country, particularly in North and West India.

There has not been even any political allegation of corruption in these schemes. Further, there has been no leakage in the Direct Benefit Transfers as all the money reaches the beneficiaries through bank accounts without even a rupee being siphoned off/being paid as gratis, to any intermediary. A former Prime Minister had famously stated in the Eighties that “only the leakages in Government schemes reach the poor”.

The Government did well in conducting an account opening campaign for the poor under which nearly 45 crore Jan Dhan Yojana (no frills/basic banking accounts) have been opened by mainly (95%) public sector banks with State Bank of India, the largest bank in India, alone opening 13/14 crore of these accounts.

What then emerges is that the mop-up-regressive in academic terms and unpalatable politically – has gone back to people especially those at the bottom of the pyramid including farmers, 86% of whom are small and marginal landholders and also for infra-spend mostly.

It may be noted that in Kerala too the repayment of loans taken by the Kerala Infrastructure Investment Fund Board (KIFFB) is set to come from petrol cess collected by the State Government.

This would probably explain at least partly the politics behind the economics of petroleum taxes and cess. Whether this approach will endure the test of time will only be known in 2024 when Indians will either vote or veto the politico-economics of these policies.  

(S Adikesavan is Chief General Manager with SBI working from Thiruvananthapuram. Views expressed are personal.)

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